Fintech – Blockchain‚ Token Sales (ICOs) & Crypto

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Introduction

At Ellul & Co we advise on:

• The set up of Purpose Trusts and Companies for fintech businesses and communities;
• Applying for a financial services licence to become a regulated Distributed Ledger Technology (“DLT”) firm.
• The set-up of Initial Coin Offerings (“ICOs”); also known as token sales.
• The establishment of cryptocurrency investment funds.

Gibraltar has a unique approach to these types of businesses and on 12^th October 2017 we introduced laws to regulate DLT firms.  Limited regulation of certain DLT use cases exists in a handful of places but no other country has introduced the comprehensive regulatory framework we have set up in Gibraltar. The law comes into effect on 1^st January 2018.

Areas of focus

Our Fintech law expertise includes the following:

• Structuring advice to optimise investment opportunities and tax efficiency.
• Token sale launches and strategic advice on the drawing up of whitepapers.
• Advice on regulatory and compliance issues.
• Drafting terms and conditions and contracts.
• Advice on anti-money laundering procedures, compliance with data protection and drafting privacy policies.

We build our service around each client. With specialist knowledge in a range of disciplines, we recognise the challenges both legal and commercial faced by businesses in these sectors.

Our clients range from global financial institutions to young entrepreneurial technology companies, including start-ups.

New law regulating DLT business

The new law [Financial Services (Distributed Ledger Technology Providers) Regulations 2017] will allow for a multitude of DLT businesses to be regulated if they conduct their operations from Gibraltar.

It does not regulate token sales but such laws are expected in 2018.

The global financial sector is passing through a period of profound change, driven by astonishing advances in technology and unprecedented customer expectations.  Within this fast emerging market, Gibraltar has launched itself as a world leader when it comes to regulation in the Fintech space and as the jurisdiction of choice to conduct DLT business. 

The DLT regulations were devised by our regulator, the Gibraltar Financial Services Commission, and its “Innovate and Create Team” who have recognised that the framework must be responsive to new use cases of DLT and needs to be flexible enough to adapt to this rapidly changing technology.  Gibraltar’s answer to this ever changing landscape was to devise a framework based on nine key principles.

The Nine Regulatory Principles

The new law establishes nine principles which DLT firms must adhere to. They are principles which all existing financial services firms will be very familiar with. The law requires DLT firms to:

1. Conduct their business with honesty and integrity.
2. Pay due regard to the interests and needs of each and all its customers and communicate with them in a way that is fair, clear and not misleading.
3. Maintain adequate financial and non-financial resources.
4. Manage and control their business effectively, and conduct their business with due skill, care and diligence; including having proper regard to risks to its business and customers.
5. Have effective arrangements in place for the protection of customer assets and money when they are responsible for them.
6. Have effective corporate governance arrangements.
7. Ensure that all of their systems and security access protocols are maintained to appropriate high standards.
8. Have systems in place to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing.
9. Be resilient and have contingency arrangements for the orderly and solvent wind down of its business.

By becoming regulated in Gibraltar, DLT firms will benefit from the certainty that they are operating within the law.  This will increase confidence in Gibraltar-licensed DLT firms and in the products and services provided by them. In this way, consumers can have faith in the integrity of their owners and managers. Regulation will also significantly enhance the appeal and marketability of DLT products.

Purpose Trusts & Companies for Fintech Businesses & Communities

Amongst our clients are a leading blockchain entity which, in terms of market capitalisation, has consistently had its cryptocurrency in the top 20.  A Gibraltar Purpose Trust is an ideal entity to promote the success of a blockchain, its community and native cryptocurrency.  A structure which can work very well is for the Purpose Trust to own a company, or any number of them, and for this entity to conduct business via a vehicle which is better-suited to commercial operations.

Initial Coin Offerings (ICOs)

ICOs are currently completely unregulated.  They are a means of selling virtual tokens in exchange for cryptocurrency (most often Bitcoin and Ethereum) or for fiat currencies in order to raise funding.  It is a form of crowdfunding which avoids the heavy regulatory and bureaucratic burdens of listing a company on a stock exchange. 

Token sales certainly have the advantage of speed to market and of no regulatory requirements.  However, when dealing with an unregulated ICO it is often impossible to tell whether the operator is legitimate and customers may have no real idea of who they are actually dealing with. 

Gibraltar will address these issues by regulating token sales which will, thereby, provide an element of consumer protection.  Even now, we follow a different approach and set up token sales on the basis that they will soon be regulated.

Cryptocurrency Investment Funds

We can advise on the set up of collective investment schemes investing in cryptocurrencies.  These can be set up as Private Funds or as Experienced Investor Funds.

The key to Gibraltar’s success in doing this is that we embrace these new areas of business and that our regulator has taken the lead in establishing a comprehensive regulatory framework for DLT business.  The mindset is to attract high quality DLT business and to encourage them to set up in Gibraltar